Impact of Banking Scams on Indian Economy

Financial or Banking scams have never been a rare phenomenon in economy of any country. However, India has witnessed a plethora of these unwanted aliens over the past 3-4 decades. From the prominent ones of Harshad Mehta, Ketan Parekh, Satyam, Subroto Roy and Spectrum Scam to the most recent ones of Nirav Modi, Vikram Kothari and Simbhaoli Sugars, many other players are hamstrung and the investigators are left to get choked. However, the economy has finally begun showing some signs of caution after the recent outbreak of India’s biggest bank fraud of more than INR 11,400 crore. It is said that if the strings are pulled tightly and every potential borrower is scrutinized as a default case, then the economy will head towards even a more difficult time that would choke legitimate credit growth of the Indian economy.

What’s the Impact?
A working paper by the Indian Institute of Management (IIM), Bangalore in 2016 stated that Indian banks had lost over INR 22,700 crore in frauds over the previous three years while the cost of frauds for last five years can be summed as INR 61,200 crore. However, if one closely look at the overall credit in banking system which was INR 83 lakh crore last year, these frauds will appear as a very small proportion of it.
Bank failures have large social consequences in any economy of a country due to its financial linkages with other parts commonly termed as “network externalities”. One of a recent report suggested the delay of 359 infrastructure projects that resulted in a cost overrun of INR 200,000 crore. The additional scrutiny in bank credit disbursement will add up to additional delays that may ultimately stall many more projects.

– Probable solution
Can governance get better? The obvious answer is a big ‘yes’. Let’s look at some probable areas that can be looked in order to avoid any banking crisis in future.

– Standard Operating Procedures (SoPs) – It is high time for public sector banks to clearly set the guidelines with ‘no-go areas’. Approvals for larger amounts should be done by higher level executives only. The audit process should also be made stringent and not restricted to putting rubber-stamp on documents.

– Integration of Software – While the domestic operations are on a single console in all the banks, international remittances such as SWIFT payments are still not integrated in the core banking operations which opens up the scope for frauds. Banks have to closely work with IT partners to bridge this gap to be able to control every penny under the single console.

– Privatization – This will optimize the overall costs and operations involved in running the financial institution. The privatization theory will stimulate a cleaner, more efficient banking system to better support the economy.

– Redefining the role of Regulator – The time has come to reframe the policies and guidelines for regulators. The Finance Minister, Mr. Arun Jaitly also hinted at the introduction of new regulations to keep a third eye on the sector. He also said tighter laws need to be implemented to ensure criminal acts in business that may eventually lead to punishment.

With large social consequences of failures as a result of banking scams, an unofficial freeze on lending by petrified bankers may be counter-productive for many businesses. The rising perception of Public Sector banks (PSBs) as a nexus of corruption is becoming more like social obligations to be underwritten by taxpayers. It is time for the government to create effective measures in view of the economic prudence of the country rather than working reactively.